Exchange-traded funds (ETFs) come in all shapes and sizes, depending on your investing interests. And their performances vary somewhat as a result. If you had invested $10,000 in the relatively narrow-focused Invesco QQQ ETF (NASDAQ:QQQ) a decade ago, you’d have about $60,000 today. Compare that to the Vanguard S&P 500 ETF (NYSEMKT:VOO), which is a broader S&P 500 index-focused fund. Had you invested $10,000 in this ETF a decade ago, you’d have over $36,000 today.
Both funds performed well during that time span. But one of the most important rules of investing is that past results don’t necessarily indicate future performance.
So which of these ETFs is the better buy in 2021? Let’s dive right in and see if we can answer that question.
What is the QQQ ETF?
The QQQ tracks the Nasdaq 100, an index of the 100 largest non-financial stocks on the Nasdaq index. Like its benchmark index, the QQQ puts heavy emphasis on tech stocks, with 47.9% of its holdings in the information technology sector. Its next largest sector concentrations are communications (19.1%) and consumer discretionary (18.6%).
The fund’s heavy tech weighting is the reason it’s delivered those astounding 10-year returns of 506% as of March 25. Tech stocks have surged over the past decade. But they’ve been especially hot over the last year as the pandemic has driven rapid shifts to working from home and shopping online.
The fund’s top five holdings are Apple, Microsoft, Amazon, Tesla, and Facebook. Those five stocks alone make up about 37% of its portfolio. The top 10 account for just over half of its allocation. The fund has an expense ratio of 0.2%, which is the percentage of the fund’s assets used for administrative and other operating fees.
The QQQ still has the potential to deliver outstanding returns over time. But it’s much more suited for investors with a high risk tolerance. Given that it’s nearly 50% weighted in the tech sector and that 10 stocks account for more than half of the fund’s investments, it’s not exactly a diversified portfolio.
Also, tech stocks have been pulling back a bit, which isn’t surprising given the stellar year they had in 2020. If you’re buying the QQQ in hopes of replicating last year’s performance, you’ll probably be in for disappointment.
What is the VOO ETF?
The VOO is also an ETF, but its benchmark is the S&P 500 index. The index tracks the performance of 500 large-cap U.S. stocks, representing more than 80% of the U.S. stock market. The VOO’s 0.03% expense ratio makes it one of the cheapest S&P 500 index funds available.
There’s significant overlap between the largest holdings of the VOO and the QQQ. The VOO’s five most heavily weighted stocks are Apple, Microsoft, Amazon, Facebook, and Google parent company Alphabet. These five stocks account for just under 20% of its portfolio; the top 10 make up about 26%.
When you invest in the VOO, you invest across all 11 stock market sectors. But tech stocks are still heavily represented on the S&P 500 and make up about 27% of the VOO’s weighting, more than any other sector. The next-most represented sectors are healthcare (13.1%) and consumer discretionary (12.4%).
The VOO’s returns over the past decade may pale compared to QQQ’s, though it’s less volatile. Still, the VOO would have tripled your money in the last 10 years, which is nothing to sneeze at. The truth is that the stock market, in general, has had an exceptional decade, and the past year has delivered unusually strong returns. So if you’re thinking about investing in the VOO, keep in mind that performance could simmer in the near term.
Which ETF is the better buy?
There’s no hard-and-fast answer to determining whether one investment is better than the other. The answer usually depends a lot on your specific circumstances.
That said, the QQQ could be the better buy for you if:
- You already have a diversified portfolio. If you already own S&P 500 or total stock market funds, pursuing higher growth with the QQQ might make sense.
- You have a long time horizon. The QQQ has a high upside, but it’s more volatile than the VOO. That may not matter if you’re a younger investor who doesn’t plan to touch that money for a decade or more.
- You have high risk tolerance. If you’d lose sleep over big swings in your portfolio, the QQQ probably isn’t the right ETF for you.
The VOO is likely the better buy if:
- You’re a beginning investor. If you’ve never invested before, the VOO is the better starting place. Once you’ve established your investment portfolio, you can add on riskier investments like the QQQ that have the potential for higher returns.
- You’re getting close to retirement. Your capacity for risk typically declines as you get older, so the VOO is probably the better buy if you’re retired or getting close to it. Keep in mind that money you’ll need in the next few years doesn’t belong in the stock market.
- You don’t like risk. That isn’t to say the VOO doesn’t have risk. There’s risk involved any time you invest in the stock market. But the VOO’s greater diversification makes it a better pick for investors who are less comfortable with big fluctuations.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/03/29/better-buy-qqq-vs-voo/